Doug writes: >In the higher rentier consciousness, the product of a CEO is, or should be, >a higher stock price, which may be the same as reported profits, but hardly >always. To that end, compensation packages have been refashioned to depend >more on stock options and less on straight salaries. Headline levels of >booty, like Eisner's depend heavily on the imputed value of options. Are >those "rents"? I think you've raised two separate issues here, Doug, one of which overlaps a point made earlier by Jim Devine. In overview I'll just say that I agree with the sense of both points, but neither contradicts the main conclusion I was driving at in my post, which is that given the nature of executive labor, execs could earn economic rent whether or not they are paid an amount that might be construed as their "marginal product" 1) Concerning the (lack of) equivalence between firm value, as reflected in current stock prices, and (discounted expected profits), which was the basis I used for discussing what the "marginal productivity" of a chief executive might mean: I agree that the two are not necessarily equivalent (and I certainly agree that stock value does not necessarily equal "reported profits"). As you know, the "capital asset pricing model" predicts this equivalence, and if stockholders are sufficiently awake and calculating, one could see why there might be a (constantly interrupted) *tendency* toward equivalence. Thus you could say I was simply following Marx's time-honored method of starting with a simple, if possibly unrealistic, basic scenario in analyzing a problem. In any case, I could have made the same point using either measure. Explaining that claim leads me to the second issue--- 2) Concerning the structure of executive compensation packages: This has to do with the *form* of executive pay, rather than the *level*, which is what I was getting at in my earlier post. The form of pay addresses the problem of incentives, a question not immediately at issue, so I ignored it for the sake of brevity. But granting your point about non-equivalence of stock value and discounted expected profit, executive compensation could in principle be linked to whichever of the two measures firm owners think CEOs should pay more attention to: pay could take the form of stock options if the former mattered, or profit-sharing if the latter. In other words, I think the tradeoff you highlight is a non sequitur: the question is not straight salary vs. stock options, it's salary plus profit-sharing (or bonuses tied to profit performance) vs. salary plus stock options. 3) Footnote: the *form* of executive pay adds a new complication to the earlier story: if a component of CEO compensation takes the form of stock options or profit-sharing, rather than straight salary, then given capitalist reality CEOs are made to bear risk. If CEOs are risk averse and mobile, firms that attempt to impose a higher than average degree of riskiness in pay will have to pay a risk premium, which under the stated conditions would logically have to be subtracted in determining what portion of exec pay constitutes economic rent. This underscores my earlier point that identifying such rent, or its absence, is likely to be difficult in practice. For example: it is well known that US CEOs earn more on average than their counterparts in West Germany and Japan. But it's also true that US CEOs receive a higher percentage of their total pay in (risky) stock options and/or performance bonuses. So what portion of the difference, if any, is due to a risk premium? to economic rent? to higher productivity of US CEOs, however measured? In solidarity, Gil
